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General p’ships aren’t limited p’ships, and it matters

It’s an age-old sitcom trope. One half of a couple defines the relationship one way, while the other half has a completely different understanding of it. Add in a third-party, and you’ve got comedy gold.

But when it comes to a business partnership, the way the relationship is defined at the beginning is essential to determining what rights an individual partner has in the event of a dispute with another partner.

Brendle

Brendle

Judge Gregory McGuire of the North Carolina Business Court recently took a deep dive into the state’s recognized partnership categories.

McGuire’s Sept. 9 order on a motion to dismiss in Gillespie v. Majestic Transport, Inc. included an impressive level of analysis of the rights held by individual members of a general partnership and how those rights differ from those retained by members of a limited partnership.

McGuire noted that North Carolina courts have clearly addressed the rights of limited partners, who find themselves in conflict with another limited partner. For the most part, limited partners cannot file a lawsuit unless they can show they suffered a direct injury caused by the alleged wrongdoer.

However, North Carolina law is far less certain when it comes to general partnerships, which allow each partner can be held personally liable for any legal actions and debts the company may face.

As Gillespie showed, North Carolina’s courts had not previously addressed whether one general partner can sue third-parties in the name of the partnership, when they coordinate with another partner against the partnership’s interests.

McGuire ultimately determined that general partners do retain that right — even if the other partner doesn’t consent to the suit — if certain conditions are met.

McGuire held that because limited partnerships are defined differently than general partnerships, the prior cases addressing limited partner disputes do not apply to the general partnership conflict at issue in Gillespie.

Brent Powell, a business litigation partner with Womble Carlyle Sandridge & Rice in Winston-Salem, said McGuire’s opinion provides a roadmap for attorneys dealing with conflicts among general partners, as well as limited partners.

“McGuire clearly gave a lot of thought to the issues and even raised questions that didn’t apply to the facts of this case but which could become an issue later,” Powell said. “He leaves the door open on some of the thornier issues, like what happens if a third equal partner doesn’t agree to the suit, and didn’t go further than he needed to. But there’s a lot to think about here.”

Third-party relationship

The dispute at the center of Gillespie stems from allegations that one equal member of a general partnership began using the resources of the other partner to make a profit for a third-party company, as well as himself.

Plaintiff James Gillespie entered into an oral partnership agreement with Enrique Urquilla in 2014 to form an interstate shipping company called Gillespie Motor Freight.

Gillespie agreed to lease nine trucks he owned to GMF. In exchange, Urquilla agreed to contribute money to the company and allegedly promised to manage GMF’s logistics, including arranging contracts and handling the company’s finances.

Each man would hold a 50 percent stake in the business.

Meanwhile, Urquilla also served as CEO of his own trucking company, Majestic Transport Inc., which owns one truck.

Court records say Gillespie and Urquilla agreed that payments received from customers for the transport of shipments with Gillespie’s trucks would go to GMF. They also allegedly agreed that customer payments for shipments carried by Majestic’s truck would go to Majestic, court records say.

Court records say the trouble began in January, when Gillespie allegedly discovered that Urquilla had coordinated with Majestic President Janeth Bermudez to use Gillespie’s trucks to haul shipments for Majestic customers.

Scarbrough

Scarbrough

Gillespie alleges that the payments from those shipments were transferred to Majestic, Urquilla and Bermudez, rather than GMF.

According to Gillespie, once the alleged scheme was discovered, Urquilla and Bermudez removed GMF’s computer and blocked him from being involved in the management and operation of GMF.

Gillespie sued Majestic, Urquilla and Bermudez in February, alleging claims for breach of the partnership agreement, breach of fiduciary duty, constructive fraud, actual fraud, civil conspiracy, conversion and seeking to impose a constructive trust on all funds belonging to GMF. Gillespie also requested an injunction barring the defendants from interfering in GMF’s business.

Importantly, Gillespie’s complaint was filed in the partnership’s name, as well as his own.

The parties were eventually ordered not to destroy the GMF computer and that the defendants had to give Gillespie access to it.

Structure matters

The defendants moved to dismiss the lawsuit for failure to state a claim upon which relief can be granted.

The theory put forward by defense attorney Andrew Brendle of Hull & Chandler in Charlotte was that Gillespie’s claims are identical to those allegedly suffered by the partnership and that the “failure to allege a separate and distinct injury…prohibits” him from bringing claims against his partner and the third-party defendants.

Brendle’s motion cited the Court of Appeals’ 2009 decision in Gaskins v. J.S. Procter Co., L.L.C. as the basis for his theory.

In Gaskins, the appeals court explicitly states that “it is settled law that one partner may not sue in his own name, and for his benefit, upon a cause of action in favor of the partnership.”

Brendle noted the state Supreme Court has also said limited partnerships, which are defined by statute, should be viewed as analogous to corporations, with limited partners acting as shareholders. Therefore, a limited partner can file a lawsuit only if he alleges a “separate and distinct” injury that arises out of a “special duty” running from the alleged wrongdoer to the allegedly injured partner.

But McGuire determined those decisions didn’t apply because they focused on lawsuits brought by limited partners against a limited partnerships — not general partnership.

“Unlike a limited partner, Gillespie has an ownership interest in the partnership property and profits as a general partner,” McGuire said. “Most significantly, Urquilla and Gillespie, as partners, had fiduciary duties to one another.”

Allegations matter

But McGuire said that just because prior case law didn’t bar Gillespie’s complaint, that didn’t mean he was free to move ahead with the lawsuit.

In North Carolina, the general rule is that one partner cannot sue another partner until there has been a complete settlement of the partnership affairs and a balance struck.

However, McGuire determined Gillespie’s claims of breach of partnership, breach of fiduciary duty, constructive fraud, fraud, conversion and civil conspiracy should be allowed to proceed because they fell under an exception to that rule.

McGuire reserved the bulk of his analysis for laying out why Gillespie should be allowed to sue Majestic and Bermudez in GMF’s name.

First, McGuire rejected Brendle’s claim that the plaintiffs had not met pre-suit requirements mandated for derivative claims because those requirements only apply to limited partnerships.

McGuire then went on to say that while North Carolina’s courts have been silent on when general partners can bring a lawsuit in the partnership’s name, courts across the country have largely reached the same conclusion. When one equal partner allegedly acts in concert with a third-party to injure the partnership, “it makes little sense to require the agreement of both partners to pursue the claim.”

That said, McGuire found that Gillespie had failed to properly plead his claim on GMF’s behalf because he did not allege that a certificate of partnership signed by both partners had been filed with the register of deeds for Cabarrus County, as required by law.

McGuire gave Gillespie 14 days to amend his complaint to comply with that requirement or GMF’s claims would be dismissed.

Unforeseen complexity

Gillespie’s attorney, John Scarbrough of Scarbrough & Scarbrough in Concord, declined to comment on whether he would be filing an amended complaint, saying he didn’t want to disclose his legal strategy.

But he said he had no idea at the outset of the case how complex the issues surrounding a general partnership were.

“Judge McGuire was very astute in spotting issues that had not been raised by the attorneys in the briefs or during oral arguments,” Scarbrough said. “But it stands to reason that if general partners, who each bear personal liability, cannot raise claims in the name of the partnership without consent, then the partnership has no protections at all.”

Brendle, however, said he “respectfully disagreed” with the judge’s analysis.

“In my opinion, just because the parties in Gaskins were limited partners, I don’t think the rule used in that case is only limited to limited partners,” Brendle said. “The logic used for reaching that rule could certainly be applied to general partners.”

The 24-page opinion is Gillespie v. Majestic Transport, Inc. (Lawyers Weekly No. 020-063-16).

 

Follow Jeff Jeffrey on Twitter @NCLWJeffrey

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